In the spring of 2020, America faced a once-in-a-century health crisis that crashed the economy and threatened the lives of millions. Republicans and Democrats came together to pass a forceful, and expensive, emergency response that helped prevent permanent scarring to the economy. Today, America’s mountain of debt is casting a shadow over Washington’s financial capability to respond to the next emergency, whatever it might be. In a future crisis, Congress may not have as much firepower to come to the rescue because the government is already saddled with $36 trillion of debt. The nonpartisan Congressional Budget Office estimates that President Donald Trump’s “big, beautiful bill” would pile another $3.8 trillion to that mountain of debt. That kind of extra borrowing would only amplify growing concerns about America’s unsustainable financial trajectory. “The US is heading in the wrong direction. This bill would be one more nail in the coffin of a country falling under an enormous debt burden,” said Kristina Hooper, chief market strategist at Man Group, the world’s largest listed hedge fund. The federal government hit a telling milestone last fiscal year: For the first time ever, interest payments on the national debt exceeded the entire defense budget. Spending on interest has more than tripled since 2017. “There’s an argument that no great power can remain a great power if it spends more on interest than defense,” said Hooper. While budget fights and deficit worries may seem arcane, there are real-world implications for what happens next. First, there’s a risk that sky-high deficits will make it harder, and more expensive, for the federal government to come to the rescue in the next crisis, whether that’s a health emergency, a financial meltdown, a war or something else. Consider that US debt-to-GDP, a closely watched gauge of a nation’s leverage, stood at around 62% before the Great Recession began in 2007. Today it stands above 120% and is on track to continue growing. The more leveraged that investors believe the federal government to be, the more they will likely demand in compensation in the form of higher interest rates. And that has significant consequences. Higher borrowing costs Many Americans will feel the impact of these higher rates — including in their cost of living. That’s because US Treasuries serve as a critical benchmark that influences the cost of other forms of credit. The higher Treasury rates go, the more expensive it will be to get a mortgage and achieve the American dream of homeownership. For homeowners, higher rates mean more expensive home equity loans to upgrade, repair and improve the value of their existing homes. The same is true for people who want to take out a car loan or pay down credit card debt. “The reason everyday Americans should care about fiscal sustainability is this is a long-running cost of living issue,” said Ernie Tedeschi, director of economics at the Budget Lab at Yale and a former economist in the Biden White House. Higher rates will also make it more expensive for businesses to borrow money to expand and hire workers. That means fewer jobs and lower wages for Americans. Less money for education, infrastructure The other issue is that every $1 billion the federal government must pay on interest is $1 billion that could be going towards something most Americans care about, like education or fixing roads and bridges. Simply put, the more the government spends on interest, the less it has to invest in more productive uses. And, in the long run, economists say that will translate to a weaker economy and a lower standard of living. Less wealth Not only that, but higher rates to service America’s mountain of debt would likely weigh on the stock market. That’s in part because boring government bonds would make stocks look more expensive in comparison. A weaker stock market makes it harder for Americans to build a nest egg for retirement, to save for their kids’ college or have a rainy day fund for a financial emergency. Higher mortgage rates would similarly keep a lid on home values, hurting a key source of wealth for many families. A full-blown crisis There’s also the risk that, at some point, there would be a full-blown debt crisis in America where the debt load is so high that investors throw their hands up and say no more. Washington got a glimpse of what that might look like earlier this year when the so-called bond vigilantes revolted over Trump’s sky-high tariff hikes, sending yields surging. Fears of a bond market catastrophe helped convince Trump to back down. “We don’t want to live through a Greece- or Portugal-style meltdown. We’re not close to that but we don’t even want to play with that,” said Douglas Holtz-Eakin, president of the American Action Forum, a center-right policy institute. Concerns about the fiscal situation sparked a market sell-off on Wednesday. Investors demanded higher rates on US debt in a 20-year Treasury auction. That weak auction drove down US stocks, bonds and the dollar. Holtz-Eakin, an economic adviser to President George W. Bush and former director of the CBO, said Congress must act because allowing the 2017 Trump tax cuts to expire would amount to a major tax hike that would hurt the US economy. Yet Holtz-Eakin said there is a way to do that without further adding to the deficit. “They’re going to make things worse than current policy. This is a bad outcome,” he said. ‘Eating away at the foundation’ The House GOP bill would only slightly boost the US economy, adding 0.5% to the gross domestic product over 10 years, according to an analysis by the Penn Wharton Budget Model. And yet the package would add an estimated $3.3 trillion to federal deficits over 10 years, the analysis found. Notably, House Republicans have not changed course even after Moody’s Ratings delivered a wake-up call last week by removing the perfect credit rating it had kept on the United States since 1917. Of course, deficit hawks have been warning of trouble for years, if not decades. And yet the United States has been able to run large deficits and US debt is still viewed as one of the safest assets on the planet. There is a risk of a boy-who-cried-wolf situation where concerns about the federal budget are not heeded. “The wolf is not at the door. The ants are in the woodwork, and they are eating at the foundation,” said Holtz-Eakin. “Every year we are cutting away from our capacity to do better because we’re borrowing so much.”
It’s a dangerous time for a big, beautiful and expensive bill
Published:
In the spring of 2020, America faced a once-in-a-century health crisis that crashed the economy and threatened the lives of millions. Republicans and Democrats came together to pass a forceful, and expensive, emergency response that helped prevent permanent scarring to the economy. Today, America’s mountain of debt is casting a shadow over Washington’s financial capability to respond to the next emergency, whatever it might be. In a future crisis, Congress may not have as much firepower to come to the rescue because the government is already saddled with $36 trillion of debt. The nonpartisan Congressional Budget Office estimates that President Donald Trump’s “big, beautiful bill” would pile another $3.8 trillion to that mountain of debt. That kind of extra borrowing would only amplify growing concerns about America’s unsustainable financial trajectory. “The US is heading in the wrong direction. This bill would be one more nail in the coffin of a country falling under an enormous debt burden,” said Kristina Hooper, chief market strategist at Man Group, the world’s largest listed hedge fund. The federal government hit a telling milestone last fiscal year: For the first time ever, interest payments on the national debt exceeded the entire defense budget. Spending on interest has more than tripled since 2017. “There’s an argument that no great power can remain a great power if it spends more on interest than defense,” said Hooper. While budget fights and deficit worries may seem arcane, there are real-world implications for what happens next. First, there’s a risk that sky-high deficits will make it harder, and more expensive, for the federal government to come to the rescue in the next crisis, whether that’s a health emergency, a financial meltdown, a war or something else. Consider that US debt-to-GDP, a closely watched gauge of a nation’s leverage, stood at around 62% before the Great Recession began in 2007. Today it stands above 120% and is on track to continue growing. The more leveraged that investors believe the federal government to be, the more they will likely demand in compensation in the form of higher interest rates. And that has significant consequences. Higher borrowing costs Many Americans will feel the impact of these higher rates — including in their cost of living. That’s because US Treasuries serve as a critical benchmark that influences the cost of other forms of credit. The higher Treasury rates go, the more expensive it will be to get a mortgage and achieve the American dream of homeownership. For homeowners, higher rates mean more expensive home equity loans to upgrade, repair and improve the value of their existing homes. The same is true for people who want to take out a car loan or pay down credit card debt. “The reason everyday Americans should care about fiscal sustainability is this is a long-running cost of living issue,” said Ernie Tedeschi, director of economics at the Budget Lab at Yale and a former economist in the Biden White House. Higher rates will also make it more expensive for businesses to borrow money to expand and hire workers. That means fewer jobs and lower wages for Americans. Less money for education, infrastructure The other issue is that every $1 billion the federal government must pay on interest is $1 billion that could be going towards something most Americans care about, like education or fixing roads and bridges. Simply put, the more the government spends on interest, the less it has to invest in more productive uses. And, in the long run, economists say that will translate to a weaker economy and a lower standard of living. Less wealth Not only that, but higher rates to service America’s mountain of debt would likely weigh on the stock market. That’s in part because boring government bonds would make stocks look more expensive in comparison. A weaker stock market makes it harder for Americans to build a nest egg for retirement, to save for their kids’ college or have a rainy day fund for a financial emergency. Higher mortgage rates would similarly keep a lid on home values, hurting a key source of wealth for many families. A full-blown crisis There’s also the risk that, at some point, there would be a full-blown debt crisis in America where the debt load is so high that investors throw their hands up and say no more. Washington got a glimpse of what that might look like earlier this year when the so-called bond vigilantes revolted over Trump’s sky-high tariff hikes, sending yields surging. Fears of a bond market catastrophe helped convince Trump to back down. “We don’t want to live through a Greece- or Portugal-style meltdown. We’re not close to that but we don’t even want to play with that,” said Douglas Holtz-Eakin, president of the American Action Forum, a center-right policy institute. Concerns about the fiscal situation sparked a market sell-off on Wednesday. Investors demanded higher rates on US debt in a 20-year Treasury auction. That weak auction drove down US stocks, bonds and the dollar. Holtz-Eakin, an economic adviser to President George W. Bush and former director of the CBO, said Congress must act because allowing the 2017 Trump tax cuts to expire would amount to a major tax hike that would hurt the US economy. Yet Holtz-Eakin said there is a way to do that without further adding to the deficit. “They’re going to make things worse than current policy. This is a bad outcome,” he said. ‘Eating away at the foundation’ The House GOP bill would only slightly boost the US economy, adding 0.5% to the gross domestic product over 10 years, according to an analysis by the Penn Wharton Budget Model. And yet the package would add an estimated $3.3 trillion to federal deficits over 10 years, the analysis found. Notably, House Republicans have not changed course even after Moody’s Ratings delivered a wake-up call last week by removing the perfect credit rating it had kept on the United States since 1917. Of course, deficit hawks have been warning of trouble for years, if not decades. And yet the United States has been able to run large deficits and US debt is still viewed as one of the safest assets on the planet. There is a risk of a boy-who-cried-wolf situation where concerns about the federal budget are not heeded. “The wolf is not at the door. The ants are in the woodwork, and they are eating at the foundation,” said Holtz-Eakin. “Every year we are cutting away from our capacity to do better because we’re borrowing so much.”
